The Role of Corporate Governance in Strategic Decision Making

by Jan Wondra; Updated September 26, 2017

One of the most important roles of corporate governance is to ensure that strategic decisions are made in the interest of those with a stake in successful outcomes. Boards have increasingly become more focused on corporate shareholders, but a shift may be beginning to occur.The interests of stakeholders, such as customers, potential customers and non-customers impacted by the decisions of a company, may begin to get attention as corporate governance plays an increasingly strategic role.

Policy Setting

Corporate governance is the system used to direct and control organizations. One of the many important roles played by corporate boards and executive committees is to establish and enforce policies deemed necessary for the effective operation of the company. These may include codes of ethical conduct towards customers, vendors, employees and shareholders, input into the organization's structure, as well as approval of functional positions and responsibilities. This may include input into the corporate culture, or a host of subtle governance cues that affect the transparency or opaqueness of strategic decision making.

Establishing Corporate Strategy

An organization's corporate board must be intimately involved with establishing a clear definition for the organization's purpose and desired outcomes. If a company sets the goal to become the global leader in telecom technology for the military market, for instance, then corporate objectives, strategic plans, financial allocations and measurable outcomes should all be measured against their ability to move the company toward that goal. If resources are being allocated to places that do not support this strategic goal, then the board's due diligence must identify the reason why and give input into which is off-strategy: the strategic goal itself or the resource actions that appear initially to be out-of-sync.

Assurance That Actions Support Strategic Positions

A company's executive team is directly accountable to the board of directors. This requires that major corporate decisions and results tracked against the corporate goals should be vetted, if not by the full board, then by the board's executive committee. Key strategic actions, such as mergers and acquisitions, major new market entries, exiting markets, closing plants, or changing the diversification mix or pricing position, are examples of decisions that require the oversight of corporate governance.

Monitoring Investment Decisions and Capital Investments

It is the responsibility of the corporate board to review and understand the financial statements of the company and to guide the prudent investment of funds to maximize net income and returns. Especially since the Sarbanes-Oxley Act of 2002 which introduced new responsibilities for financial reporting, corporate boards must be vigilant regarding the strategic impact of new requirements for internal controls. Corporate boards must also review and understand product portfolio and support the executive management team, offering strategic oversight regarding adjustments to the product mix, approving or shifting capital investment to product categories with the most potential to maintain and grow revenue streams and manage expenses. At the same time, corporate board members have a difficult task: helping the executive team balance the short-term goals so desired by shareholders with the long-term investment necessary to ensure the company's future.

Accountability to Stakeholders

From a governance perspective, accountability, while often focused on stock shareholders, can sometimes become something heretofore unconsidered. Historically, business school curriculum has emphasized responsibility primarily for stock shareholder returns, leaving the responsibilities of a corporation to be a good corporate citizen often overlooked. As stock prices and quarterly dividends have taken center stage, long-term investments are often set aside. Critical aspects of corporate governance responsibilities, such as infrastructure investment, plant retooling, workplace safety or disaster planning, have often been ignored or delayed past safe time parameters. The Gulf oil disaster in 2010 demonstrated questionable judgment by the corporate governance of British Petroleum (BP). While the lapse was perhaps shared by many oil producers, it followed years of unprecedented revenue growth and shareholder returns. As unprecedented profits rolled in, it appeared that little to no corporate investment was designated to technology, safety inspections or deep water disaster response plans, even as oil reserves were tapped in deeper and deeper water. Surely the stakeholders in this disaster go far beyond BP shareholders and include the fishermen and small business people whose livelihoods were destroyed, the wildlife being killed by it and the people of the Gulf, whose lives would be impacted for decades to come. A corporate board that does not prepare for crisis, or consider the broad impact of their operational decisions, is not fulfilling its board mandate.

Resources

About the Author

Jan Wondra began writing in 1979 for the "Milwaukee Journal," "Minneapolis & St. Paul Skyway News," Sauk County Media and "Adoptive Family" magazine. She holds a Bachelor of Science in journalism and design from the University of Wisconsin.

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Wondra, Jan. "The Role of Corporate Governance in Strategic Decision Making." Bizfluent, https://bizfluent.com/about-6618246-role-governance-strategic-decision-making.html. 26 September 2017.

Wondra, Jan. (2017, September 26). The Role of Corporate Governance in Strategic Decision Making. Bizfluent. Retrieved from https://bizfluent.com/about-6618246-role-governance-strategic-decision-making.html

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